Question

White Company has two departments, Cutting and Finishing. The company uses a job-order costing system and computes a predetermined overhead rate in each department. The Cutting Department bases its rate on machine-hours, and the Finishing Department bases its rate on direct labor-hours. At the beginning of the year, the company made the following estimates: Direct labor-hours Machine-hours Total fixed manufacturing overhead cost Variable manufacturing overhead per machine-hour Variable manufacturing overhead per direct labor-hour Department Cutting Finishing 7,000 72,000 62,600 1,200 $ 350,000 $ 547,000 $ 2.00 - - $ 2.75 Required: 1. Compute the predetermined overhead rate for each department. 2. The job cost sheet for Job 203, which was started and completed during the year, showed the following: Department Cutting Finishing 12 Direct labor-hours Machine-hours Direct materials Direct labor cost 86 $ 750 $ 63 $ 380 $ 252 Using the predetermined overhead rates that you computed in requirement (1), compute the total manufacturing cost assigned to Job 203. 3. Would you expect substantially different amounts of overhead cost to be assigned to some jobs if the company used a plantwide predetermined overhead rate based on direct labor-hours, rather than using departmental rates?

Answer 1

Required 1 :
	Department
	Cutting		Finishing
Predetermined overhead rate	7.75 [ (360000/62600)+2.00 ]	per MH	10.35 [ (547000/72000)+2.75 ]	per DLH

Required 2 :
	Job 203
Direct materials ( 750 + 380 )	1130
Direct labor cost ( 63 + 252 )	315
Manufacturing overhead allocated [ ( 86 * 7.75 ) + ( 12 * 10.35 ) ]	791
Total manufacturing cost	2236

Required 3 :

Answer : Yes

Reason : In departmental rates the overhead is applied based on the main activity of the department and in plantwide predetermined overhead rate the overheads are applied on the basis of only one factor, so the amount of overhead assigned to jobs can substantially differ.